Loss of Subsidies Could Burst EV Bubble

Sales of electric cars and batteries will climb steadily over the next five years, but what happens if government subsidies disappear?

That could change things, according to a Lux Research study. Though the study paints an optimistic picture of the lithium-ion battery market over the next five years, it also predicts a precipitous drop if tax credits are removed. And the study's author says that could happen as soon as 2019.

I see three drivers of PHEV / Hybrid / EV Sales: 1/ tax credits to consumers, 2/ regulatory requirements for fleet miles per gallon (MPG) ratings, and 3/ consumer demand. While direct tax credits to consumers may wane (I hope I get my PHEV first), regulatory requirements to increase fleet MPG will cause car manufacturers to sell such vehicles at a competitive price. This actually is in their long term interest because once consumers are convinced that the experimental models are reliable and achieve the reported gas savings, they'll be motivated to buy and economies of scale can begin to kick in. I bought my hybrid 8 years ago, the premium price paid for itself in 18 months but my peers were reluctant to follow suit. Now, nearly a decade later, hybrids are well accepted and commonly observed in the New York City taxi fleet. PHEV technology is now the experimental edge. We're getting there. If gas prices in the USA reflected global prices (with the increases paying for infrastructural improvements and not gasoline company profits), the process might move ahead a little faster.

Barring a major improvement in the battery technology, what happens to EVs depends on what happens to the alternatives. Liquid fuels are unlikely to go down in price or up in energy content. EVs need more range and quick refueling. Quick refueling probably means battery swap and that would require standardization and infrastructure.

"...the American middle class is getting poorer and has less to spend. This is a troubling cycle, economically speaking."

Yes, the U.S. is going through a prolonged deleveraging process, which can be attributed to years of overspending and increasing debt (at both the individual and government level) that couldn't go on forever. Detroit is another symptom of this. True, it had to deal with a declining population and tax base (for which it was not entirely blameless), but never addressed the problems in any meaningful way until it was too late.

Rich noted: [China's industrial subsidies are] certanly a bad deal for the Chinese populace (who are footing the bill), but a great one for U.S. consumers who are able to buy goods at below-market prices.

Yes, in terms of spending by the US middle class. But, partly because those manufacturing jobs are in China, the American middle class is getting poorer and has less to spend. This is a troubling cycle, economically speaking.

On the other hand, it's a good deal for the Chinese middle class, which is on the rise. Twenty years ago, who thought we'd ever hear "China" and "labor shortage" in the same sentence? Or see Detroit -- the buckle on America's industrial belt -- file for bankruptcy?

I understand that view, Patrick. But I'm not sure I agree that all government subsidies are inherently bad or that the market always chooses what is best for our society.

Two examples; If the Chinese heavily subsidize their industries (they do) and US manufacturers must compete, is that a fair game?

If it's in society's interest to shift to more energy-efficient electric cars over gas burners, is the government wrong to give the electric car makers a jump start? (pun intended)

I would agree on this: you can only subsidize to a point. If the public simply doesn't want to buy the product, there's no point in supporting it forever. And I don't think it's a bad idea to have automakers repay some of that money if sales take off.

Hey Tom, if it were all about efficiency, a smart car, or our old favorite, the Toyota Corolla, would be a better fit, My overarching point though is to let the free market decide. We want to lower emissions, but we also need to keep the economy moving. The market will respond to both over time.

Well said, Prabhakar. The subsidy is intended to be a push-start for these cars. Not a permanent solution to sales. Clearly the price must come down as production ramps up, assuming demand materializes.

Patrick: You say remove the subsidies, citing the strain on energy resources, but don't present the alternative. Transit? Bicycles? Should only the wealthy have cars? Seriously, we need new thinking -- what's your vision of transportation that makes sense?

(I ride a bike 3 times as much as I drive, and take a ferry part-way to work -- although it costs as much as driving and takes twice as long. If I had a better idea, I'd be using it.)